Cash has no memory

What would a government-backed digital currency look like? A country’s central bank would need to become a deposit-taking institution and hold accounts on behalf of citizens and businesses. All of their debits would be tracked on the central bank’s blockchain, a digital ledger resistant to tampering. The central bank would pay interest electronically by adjusting the balances of depositor accounts…

Depositors would no longer have to rely on commercial banks to hold their checking accounts, and the government could get out of the risky deposit-insurance business. Commercial banks that wished to keep making loans would raise long-term capital in the debt and equity markets, ending the mismatch between demand deposits and long-term loans that can cause liquidity problems – Max Raskin and David Yermack “Preparing for a world without cash.”

Do we all need to have accounts directly at the Fed, and is a blockchain the best way for the Fed to handle transfers?

The point of the blockchain is to demonstrate the validity of each “dollar” by keeping a complete encrypted record of its creation and each person who held it along the way.

Its archival blockchain links together all previous transfers of a given unit of currency as a method of authentication. The blockchain is known as a “shared ledger” or “distributed ledger,” because it is available to all members of the network, any one of whom can see all previous transactions into or out of other digital wallets 0 Max Raskin and David Yermack

That, and a limited supply to control its value, was the basic idea of bitcoin. But when we are clearing transactions by transferring rights to accounts at the Fed, the validity of the “dollar” is not in question. It’s at the Fed. And, the big advantage relative to bitcoin as I see it, the value of the dollar comes from monetary policy and ultimately the government’s demand for “dollars” to be paid in taxes, not from a fixed supply as was the case with gold.

The biggest stumbling block in my mind is “all members of the network, any one of whom can see all previous transactions into or out of other digital wallets.” Per Max and David, this has pluses and minuses:

Tax collection would become much simpler, and tax evasion and money laundering could become prohibitively difficult…

Yet the centralization of banking under this system would also create a Leviathan with the power to monitor and control the personal finances of every citizen in the country. This is one of the chief reasons why many are loath to give up on hard currency. With digital money, the government could view any financial transaction and obtain a flow of information about personal spending that could be used against an individual in a whole host of scenarios – Max Raskin and David Yermack

This really is a big change in how “money” works. Traditional cash has a lovely property, that it has no memory.

The anonymity of cash makes it enduringly popular — cash holdings are up, not down in the digital age. No greater testimonial than the planeload of cash delivered by the Obama administration to Iran. It’s not hard to figure out why both Iranians and Administration needed to send old-fahshioned bills on an unmarked plane, not a wire transfer.

Governments like to pass aspirational laws with little intention to enforce. Get rid of cash, and rigorous enforcement of all transactions would not only stop your kids lemonade stand and babysitting business, it would wipe out most of the employment opportunities for lower-income America. Many businesses would come to a halt.

creating and respecting privacy firewalls and rethinking legal-tender laws could mitigate the dangers of monopoly and stifled competition in currency markets – Max Raskin and David Yermack

The dangers are not of monopoly and competition, the dangers are in the vast loss of privacy that the government, and its leakers and hackers knowing all our transactions implies.

The Fed, Treasury, and the government in general are very good at defining the units of a currency, and providing an easy standard of value — cash, coins, liquid government debt, reserves. That is their natural monopoly. I don’t see that the government has a similar natural advantage in providing low-cost transactions services, especially on monitoring fraud in the use of those services.